Q4 2022 Bank of Nova Scotia Earnings Call
Yeah.
[music].
This conference is being recorded.
Sales at all or is this thing.
Good morning, and welcome to Scotia Bank's 2022 fourth quarter results presentation. My name is John Mccartney I'm head of Investor Relations here at the bank.
This morning, Brian Porter Scotia, banks, President and Chief Executive Officer, Raj Viswanathan, Our Chief Financial Officer, Bill Thomas Our Chief Risk Officer.
Following our comments, we'll be glad to take your questions also present to take questions are the following scotiabank executives Dan.
Dan Rees from Canadian banking, Glen Gowland from global wealth management Nacho.
I'm not sure the shock from international banking, Jake Lawrence from global banking and markets.
Before we start on behalf of those speaking today I'll refer you to slide two of our presentation, which contains scotiabank caution regarding forward looking statements with that I will now turn the call over to Brian . Thank.
Thank you John and good morning, everyone.
I will begin with review of the bank's performance and progress over the course of fiscal 2022.
After which Raj will review the financial year in more detail.
Phil Thomas our Chief Risk Officer will review risk performance, we will be pleased to then take your questions.
Given that this will be my last quarterly call as CEO I will close off with a few final remarks.
2022 fiscal year was indeed, a year in which the diversification of our businesses by both product and geography allowed us to continue to deliver strong all bank results.
Despite heightened market volatility and rapid monetary response to deal with elevated inflation across our operating geographies each of our businesses performed well.
The bank delivered adjusted earnings of $10 8 billion in fiscal 2022 or $8 50 per share.
The 8% increase over 2021.
And a strong 15, 6% all bank return on equity both exceeded our medium term financial targets are.
Our common equity tier one capital position at 11, 5% has us well positioned to continue to support organic growth initiatives, while continuing to return capital to our shareholders.
Loan growth was robust up 15% with deposit growth commensurate, 15%, which is a result of concentrates.
Concentrated efforts and strategies to strengthen our core deposit franchise.
As Phil will detail, we continue to observe very strong credit metrics across our portfolios. Despite the inflationary pressures that have been a reality for businesses and households alike over the course of the past year, our full year PCL ratio was well within our guide.
It's a 25 basis points provided at this time last year.
Strong underlying fundamentals and our higher quality secured exposures have us confident that we will deliver against our previously provided expectations in the coming year.
Specific to Q4 results adjusted earnings of $2 6 billion or $2 <unk> per share represented a solid finish to the year.
Canadian banking delivered earnings of $4 8 billion.
Very strong 15% increase over the prior year and more notable progress against our strategic initiatives and support our future growth.
Our business Bank, which includes our commercial small business and Ryan that franchises delivered another strong year in 2022.
This business has been a key driver of Canadian Bank performance and we are particularly pleased with the important role that our team has played in helping commercial clients expand their businesses post the pandemic in a strong funding profile that this business provides.
This year's launch of scenes plus is another example of our ongoing efforts to further deliver value to our retail customers.
The addition of Empire company to the partnership and the inclusion of its brands, including <unk> <unk> and Iga to the program have added flexibility to earn and redeem points on everyday grocery in addition to banking entertainment dining and travel.
Same plus relaunch has resulted in more than one 2 million new members joining the program.
Which now totals over $11 2 million Canadians.
And we continue to see strong performance at Tangerine.
Canada's leading digital bank.
Tangerine grew deposits by over $4 billion. This year and continues to grow assets through a focused strategy to become an everyday bank of choice for value oriented Canadian consumers.
Our global wealth business showed strong resilience in fiscal 2022 generating earnings of $1 6 billion. Despite the revenue impact of softer financial markets on fees.
In the asset management business expenses continued to be well managed.
Market share gains and strong investment results and dynamic times provided some offset to the impact of lower fixed income and equity markets. During the course of the year.
On the advisory side of our business double digit growth led to record results in each of our private banking Scotia, Mcleod and private investment counsel channels.
We continue this year to build and introduce new digital tools.
And platforms to enhance the customer investment experience, including Scotia, Smart Investor and Scotia, Smart money at five plus as well as a new generation.
Of our I trade mobile App.
Our global banking and markets business had a solid finish to the year in Q4, resulting in earnings of $1 9 billion for the fiscal year down a respectable 8% year over year in a very challenging period of market conditions are.
Our GBM business in Latin America reported in the International banking segment continued to show strong momentum delivering record Q4, and annual earnings contribution of $232 million and $809 million respectively.
And rounding out our GPS strategy, our business in the United States has also grown significantly with earnings up 11% and this fiscal year.
Our international business delivered significantly improved fiscal 2022 earnings of $2 4 billion up 37% from the prior year.
A result of stronger loan volumes expanding margins and impressive expense management, while also benefiting from a lower tax rate.
Our IP retail businesses performed well and continued to benefit from the efficiencies that resulted from our continued efforts to further digitize our platform.
Our Caribbean businesses performed well delivering earnings in the quarter of $110 million.
Up 42% year over year.
In the Caribbean unit is back to a more normalized level of contribution.
Our results this year clearly reflect solid contributions across our businesses and the ability to absorb periods of volatility as evidenced by the challenging conditions faced by our market sensitive businesses and <unk>.
Recent quarters.
Turning to our outlook global growth prospects have clearly been impacted by the Central Bank Central Banks war on inflation and affected our various operating geographies in different ways and at a different pace.
Central banks in Canada, and the United States appear to be nearing the end of their tightening cycles as inflation finally appears to be slowing.
In Canada, the economic economic growth is moderating.
That economic levels of activity remained robust the strength of our labor market and strong balance sheets, along with robust commodity prices are providing a counterbalance to the impact of a less plant European and Asian economic environment.
In the Pacific Alliance countries growth is moderating.
From its recent pace.
<unk> seen over the past year central banks in our key Latin American economies have responded early and aggressively to inflation with Orthodox monetary policy and despite this we have not seen any meaningful reduction in capital flows in the region.
We are confident that this decisive action will allow most central banks to hit terminal rate soon and allow others to ease during fiscal 2023.
The bank continues to be recognized for industry excellence throughout our footprint. We were again recognized as bank of the year in Canada for the third year in a row and investment bank of the year for the Americas by the banker.
<unk> Best Bank in Canada by Euromoney.
Fiscal 2022 was also a year of great progress on our commitments to the environment and the communities in which we live and work.
We have now mobilized a total of 96 billion of client related financing up from 58 billion last year, putting us well on track to achieve targets communicated in our inaugural net zero pathways report published earlier this year.
Since launching Scotia rise, our $500 million 10 year community investment commitment, we have partnered with more than 200 nonprofit organizations and made more than $60 million and community investments globally, creating opportunity for hundreds of thousands of people and communities, where we live and work.
And our Scotia Bank Women's initiative continues to grow our capital deployed to women and women led businesses grew to $5 6 billion against our target to reach 10 billion by 2025 and.
And finally, one of my proudest moments as CEO just last month, we were recognized as one of the top 25 World Best workplaces.
By Great place to work Institute, the only Canadian headquartered company and the only bank to be recognized in the field.
Overall, we are very pleased with our financial results and progress on many strategic growth initiatives over the course of the past year and with that I'll turn the call over to Raj.
Thank you, Brian and good morning, everyone.
This quarter's net income was impacted by sudden adjusting items of $504 million after tax of 42 of EPS.
And about two basis points on a common equity tier one ratio that was recorded in the other segment.
This consisted of 66 million restructuring charge relating to the re alignment of southern GBM businesses in Asia and ongoing technology modernization.
$98 million of Suffolk costs relating to the expansion of our St plus royalty program.
And at $314 million currency related loss, resulting from the sale of investments and associates.
In Venezuela, and Thailand, as well as the wind down of operations in India and Malaysia.
All my comments on the bank and the other segment that will fall off will be after adjusting for these items.
So starting on slide five on fiscal 2022 performance the.
The bank ended the year with adjusted diluted earnings per share of $8 50.
Our return on equity of 15, 6%, both exceeding our medium term objectives.
Revenue was up 2% and expenses increased 3%, resulting in negative operating leverage for the year.
Our business lines, particularly our P&C businesses had strong performance.
Canadian banking earnings increased 16%, while international banking earnings increased 37% on a constant currency basis.
Global wealth management earnings of $1 6 billion, but down a modest 1% year over year as higher net interest income and brokerage revenues, but offset by lower mutual fund fees.
Led primarily by market conditions and higher volume related expenses.
Global banking and markets supported earnings of $1 9 billion down 8% compared to fiscal 2021.
Solid business banking performance, including strong loan growth momentum was offset by weaker capital markets performance, and which the industry face challenging market conditions.
The banks earnings in 2023, I would expect it to benefit from higher interest income and noninterest revenue.
Be impacted by higher funding costs higher expenses.
Normalizing provision for credit losses relating to the end up performing allowance releases and a higher tax rate in both Canada and certainly international countries.
Once rates stabilize.
<unk> is expected to benefit from asset repricing, resulting in net interest margin expansion.
The bank's capital and liquidity position is expected to remain strong in 2028.
I will now review the performance for the quarter on slide six.
The bank supported solid quarterly adjusted earnings of $2 6 million and diluted earnings per share of $2 <unk>.
And our return on equity was 15%.
All bank pretax pre provision profit increased 2% year over year impacted by the other segment.
The tax provision profit of the full business lines in aggregate increased 7%.
Detailed on slide 25.
Revenues were up 4% year over year as an increase in net interest income of 10% more than offset a decline in noninterest revenue of 2%.
Mainly driven by lower wealth management revenues lower unrealized gains on non trading derivatives and lower income from associated corporations.
The net interest margin declined four basis points quarter over quarter, mainly driven by the increase in funding cost due to the velocity of administered rate increases.
The impact of the Canadian banking net interest margin of eight basis points was partially offset by the 13 basis points expansion in the international banking, which benefited from asset repricing.
The PCL ratio was 28 basis points for the quarter up six basis points.
Last quarter.
Year over year adjusted expenses increased by 6%.
And by higher personnel costs and performance based compensation and spend to support the business growth.
The productivity ratio was $53.
7% this quarter, while the full year operating leverage was negative one 1%.
Yes.
Slide seven provides an evolution of the common equity tier one ratio for the quarter as well as the quarters changes in risk weighted assets.
The bank reported a common equity tier one ratio of 11, 5% up 10 basis points from last quarter, primarily from strong earnings net of dividends that exceeded 21 basis points.
This weighted assets grew $9 6 billion in the quarter.
Mostly related to foreign exchange.
Excluding the impact of FX loan growth was six 1 billion.
Bind with positive migration the CET, one ratio benefited two basis points.
The impact of higher rates on the bond portfolio.
Held for liquidity purposes, and fair value through OCI at 14 basis points impact on the CET one ratio this quarter.
Our priority remains to deploy capital to support organic growth initiatives in each business line, while prudently managing capital in the face of a less certain.
Economic topical.
Turning now to the business line results beginning on slide eight Canadian.
Canadian banking reported earnings of $1 2 billion, a decrease of 5% year over year, while pre tax pre provision profit grew 10% year over year, driven by revenue growth of 11%.
Net interest income increased 13% as loan and deposit growth continued while the net interest margin declined three basis points since Q3.
As lowest spreads in particular, the prime SEDAR compression.
<unk> on fixed rate asset repricing and lower mortgage prepayments were partially offset by higher deficits sites.
As expected.
Quarter over quarter mortgages grew a modest 1%, but increased 11% compared to the prior year.
<unk> loans grew a strong 25% compared to last year.
Asset growth during the quarter was strong at 7% year over year.
Even by an 8% increase in personal deposits and a 6% increase in non personal deposits.
Non interest income increased by 3% due primarily to higher banking revenue and foreign exchange fees, partially offset by lower mutual fund distribution fees.
<unk> expenses increased 12% year over year, driven by higher technology and personnel costs to support business growth.
The segment generated positive operating leverage for the year of one 5%.
The PCL ratio was 15 basis points, an increase of six basis points compared to the prior quarter at 25 basis points compared to the prior year.
Canadian banking revenue growth is expected to be driven by deposit and loan growth with stable margins, while mortgage growth is expected to decelerate.
The segment will maintain strong expense discipline to generate positive operating leverage.
<unk> 23 earnings are expected to be impacted by normalization and provision for credit losses.
And the higher tax rate.
Turning now to global wealth management on slide nine.
Earnings of $368 million declined 6% year over year.
Revenue declined 4% due primarily to lower fee income driven by lower assets under management and isolate volume.
Partially offset by higher interest income driven by strong loan growth and improved margins.
Expenses declined 3% driven by lower volume related expenses, while the product activation of this quarter was 61, 2%.
Speaker 1: and adjusting for performance fees generated operating leverage of positive 0.8% in the full fiscal year. Assets under management decreased 10% to $311 billion while assets under administration decreased 3% to $580 billion primarily due to market depreciation. Despite a challenging market environment, we continue to be ranked number two by assets in the Canadian retail mutual fund industry. Investment returns have been strong across core share global asset management with 72% of assets in the top two quartiles over a five-year period as of October . Dynamic funds is ranked number three among independent asset managers with 87% of assets in the top two quartiles over a five-year period. We also saw strong growth in our key international markets with double digit earnings growth across the Pacific Alliance wealth management businesses. Global wealth management expects modest revenue growth and will continue to invest in the business while remaining focused on managing expense growth in line with revenue growth. Earnings are expected to remain stable in 2023 reflecting the slowing economic backdrop and a higher statutory tax rate. Turning to slide 10, global banking and markets generated earnings of $484 million, down 4% compared to the prior year but up 28% compared to the prior quarter. The results were driven by strong loan and deposit growth as loans grew 31% year over year while deposits grew 12%. slew producer struck the
Speaker 1: as net interest income grew 35% driven by strong volume growth and expanding margins. Non-interest income grew 6% as higher banking revenues were partially offset by weaker primary and secondary markets. Capital markets revenue was down 9% from last year. However, it rebounded 19% from the prior quarter.
Speaker 1: Expenses were up 18% year over year due mainly to personal costs and technology costs to support business development and the negative impact of foreign policy conservation.
Speaker 1: GBM Latin America, which is reported as part of international banking, reported record earnings of $232 million, up 29% year over year, with particularly strong results from Chile and Brazil.
Speaker 1: Global banking and markets expects to deliver earnings growth in 2023.
Speaker 1: Through the Americas strategy, the segment continues to deepen client relationships while also adding new clients.
Speaker 1: Capital Markets results are expected to improve driven by more favorable market conditions and increased levels of client activity.
Speaker 1: The segment plan should deliver on disciplined expense management that is expected to result in positive operating leverage to more than offset any increase in provision for credit losses.
Speaker 1: Site 11 highlights this quarter's strong international banking results. My comments that follow are on an adjusted and constant dollar basis.
Speaker 1: The segment reported a net income of $650 million, up 25% year over year.
Speaker 1: Pre-tax pre-provision profit grew 9% year over year, with the Pacific Alliance growing 6% and Caribbean and Central America up 18%.
Speaker 1: Year-over-year loans grew 12% with commercial loans also up 12% and mortgages up 16% while commercial loans and credit cards grew 9%.
Speaker 1: Revenue was up 8% year over year, driven by higher net interest margins, strong capital markets and banking fees.
Speaker 1: and partially offset by lower gains.
Speaker 1: in investment securities.
Speaker 1: Quarter over quarter, the net interest margin improved a strong 13 basis points.
Speaker 1: Assets reapply faster to offset the increase in funding costs and impact from changes in deposit mix.
Speaker 1: Provisions for credit law office ratio decrease year-over-year by 2 basis points to 89 basis points.
Speaker 1: Noninterest expenses increased 7% year-over-year, driven by business growth and inflationary impacts partially offset by the benefit from efficiency initiatives executed last year.
Speaker 1: The tax rate of 13.6% for the quarter and 18.9% for the year benefited primarily from higher inflation benefits in Mexico and Chile.
Speaker 1: With lower inflation expectations in 2023, the tax rate is expected to return to more normal levels starting in Q1 2023.
Speaker 1: The segment generated positive operating leverage of 1.8% for the whole year.
Speaker 1: Revenues in the international bank are expected to benefit from loan growth and modest net cost margin expansion.
Speaker 1: as a result of the expected stabilization of interest rates.
Speaker 1: and potential rate reductions in the second half of 2023.
Speaker 1: Expenses are expected to grow in line with revenue, supported by strong digital progress to deliver positive operating leverage.
Speaker 1: Earnings are expected to be impacted by normalizing provision for credit losses.
Speaker 1: and a higher tax rate.
Speaker 1: Now turning to the other segment.
Speaker 1: We reported an adjusted net loss of $100 million compared to a loss of $35 million in the prior...
Speaker 1: Year over year, the change was a result of higher funding costs resulting from higher interest rates and asset liability management activities.
Speaker 1: With that, I'll turn the call to Phil to discuss first.
Speaker 2: Thank you, Raj. Good morning, everyone.
Speaker 2: For fiscal 2022, the bank reported an all-bank PCL of 19 basis points, well within our guidance of 25 basis points.
Speaker 2: As we look to 2023, we remain confident that our PCL ratio will be in the mid 30s basis point range. This is driven by three key factors.
Speaker 2: a higher quality customer mix.
Speaker 2: A more stable and predictable portfolio driven by a higher level of secured lending.
Speaker 2: and our strong credit and underwriting fundamentals which position us well for macroeconomic uncertainty.
Speaker 2: I will now highlight some of the trends we are seeing for the quarter across our portfolios.
Speaker 2: Despite higher interest rates and inflation, our customers' financial health remains resilient.
Speaker 2: Canadian retail deposits on average are 13% higher than they were in February 2020.
Speaker 2: And delinquency of 90 plus days for Canadian retail has been stable at 15 basis points for the last three quarters and roughly half of the pre-pandemic ratio.
Speaker 2: We remain confident in our Canadian mortgage portfolio.
Speaker 2: After six rate hikes by the Bank of Canada this year, our Canadian variable rate mortgage customers continue to maintain high liquidity with approximately 36% higher balances in their deposit accounts compared to fixed rate customers.
Speaker 2: Our uninsured mortgage portfolio has an average LTV of 49% and average FICO scores of 799.
Speaker 2: in international banking.
Speaker 2: Our retail portfolio remains 72% secured versus 65% pre-pandemic.
Speaker 2: High quality rated customers also remain at 96% of originations.
Speaker 2: Portfolio delinquency of 90 plus days increased marginally this quarter by 8 basis points, in line with slowing economic growth but remained well below pre-pandemic levels.
Speaker 2: Finally, in business banking, we have observed upgrades across the portfolio due to customer performance. Credit quality and liquidity levels remain strong.
Speaker 2: While business banking gross impaired loans are up slightly quarter over quarter.
Speaker 2: They are primarily driven by foreign exchange fluctuations and one account in international banking.
Speaker 2: Now turning to PPL on slide 15.
Speaker 2: PCL at this quarter were 529 million. This increase in our PCL ratio this quarter to 28 basis points reflects normalizing trends.
Speaker 2: and forward-looking indicators.
Speaker 2: The increase from last quarter was mainly driven by Stage 3 PCLs up 105 million as delinquency levels rose modestly, primarily in international retail and GBM, though remaining well within our expectations and well below pre-pandemic levels.
Speaker 2: Year over year, performing PCLs were up, driven by a less favorable macroeconomic forecast and strong portfolio growth.
Speaker 2: We continue to be focused on high quality credit originations and diversification across markets as we look to fiscal year 23.
Speaker 2: Our current allowances for credit loss at this quarter were $5.5 billion.
Speaker 2: up 204 million quarter of a quarter, or an ACL ratio of 71 basis points.
Speaker 2: non-performing ACL increased slightly this quarter.
Speaker 2: as we saw small increases in yield formations and net write-offs primarily driven by international retail and commercial.
Speaker 2: Total ACL coverage represents about 12 quarters of net write-offs, almost double our pre-pandemic levels.
Speaker 2: While the current macroeconomic environment continues to be uncertain, we remain prudent in building allowances in response to these changing conditions.
Speaker 2: Our coverage reflects the quality of our portfolio, strong credit practices, and changes to business mix.
Speaker 2: Looking ahead to Fiscal 2023, we expect strong credit performance to continue.
Speaker 2: While pressure from inflation and interest rates will continue to be a factor, we believe our efforts to de-risk our portfolios have positioned us well to manage economic uncertainties.
Speaker 2: For these reasons, our earlier outlook of PCL ratios in the mid-30s basis point range remains unchanged.
Speaker 2: And finally, I would like to congratulate Brian .
Speaker 2: and thank Brian on behalf of all Scotiabankers globally for his 41 years of service and be...
Speaker 3: Thank you, Brian . Thank you. I will now turn the call over to John for Q&A. Thanks, Phil. We'll now be pleased to take your questions. Please limit your question to one and then rejoin the queue to allow everyone the opportunity to participate in the call. Operator, can we have the first question on the phone, please? Thank you. Please press 1 at this time if you have a question. There will be a brief pause while participants register for questions. We thank you.
Speaker 4: Thank you for your patience. Our first question is from Abraham Poonawalla from Bank of America. Please go ahead.
Speaker 4: Our first question is from Abraham Pinawala from Bank of America. Please go ahead. Good morning.
Speaker 5: I guess maybe Raj for you on the net interest margin.
Speaker 5: If we can just break down in terms of the outlook for the margin consolidated versus the Canadian and the international banking name, you gave some colour earlier, but what happened to the three margins in a world where Bank of Canada, the central banks are hiking rates and do we actually need rate cuts in Canada for the Canadian bank name to stop going lower? I've learned a bunch.
Speaker 1: Thanks, everyone, and good morning.
Speaker 1: I'm not going to focus margin quarter by quarter and I'll ask Dan or Natsha to comment on the specific business line margins.
Speaker 1: But I would call out four important factors when you think about net interest margin evolution over the next two years, you know, 23, 24, lots of things that are happening.
Speaker 1: Projection of central bank industry changes definitely is going to be a factor of how our margin reacts to it at the all bank level.
Speaker 1: The schedule of assets repricing that's actually quite well underway both in IP as well as it's starting to do in the Canadian banking business segment.
Speaker 1: And this we expect it to accelerate.
Speaker 1: Changes in business mix as the bank expects to generate less low margin mortgages, you know the business has slowed down as I eat.
Speaker 1: set in my prepared remarks in the Canadian Bank, and of course deposit margin behaviors.
Speaker 1: So these factors have always been a key for the net interest margin evolution for this bank and I think it will be key to the household evolvement 2023 and into 2024 as well.
Speaker 1: Dan, do you want to say something about the Canadian Bank margin or...
Speaker 1: Ibrahim, it's Dan here. I would just say that we expect margin
Speaker 1: in the Canadian bank to build up the Q4 levels as I look at the full year of next year. Certainly the change in business mix has an impact and of course the speed of loan repricing is underway through the course of this quarter and we expect that to expand into next year. The composition of deposits is important to bear in mind here obviously. As we grow our business banking book there's a fair portion of non-maturity deposits in there for which...
Speaker 1: The deposit name has been a tailwind this quarter and we expect that to continue for the next couple of quarters. And I think our emphasis on deposits may well have been overshadowed in the front half of the year where we saw strong mortgage growth. Clearly in the last two quarters you've seen deposit growth rates in Canadian banking equal or beat loan growth rates and in Q4 in balances, deposits grew faster than loans. So that emphasis on a balance.
Speaker 1: where 50% of our balances are US dollars. NIM increased 38 BIPs in the quarter, driven by the benefit of higher FED rates.
Speaker 1: And in the Pacific Alliance, countries need to increase three bps in the quarter, with assets repricing faster than liabilities.
Speaker 1: I would say central banks in the Pacific allies countries took proactive measures in advance of the Fed to increase interest rate. The tightening SIG cycle is ending, and it is likely they will be some of the first countries to start a reduction trend in 2023, starting with Chile.
Speaker 5: Just one follow up on that Dan, why is the Canadian name not going higher given just the $112 billion of variable rate mortgages? Is the spread compression offsetting the increase in benchmark rate or am I missing something?
Speaker 1: There's just a lot of moving parts, Ibrahim. Certainly we did see in Q4 the movement to fix and mortgages occur as we had been indicating for some time, so that would have been a component. The movement out of low-pay deposits into term as consumers were anxious about equity markets, that would have been a component. There's a lot of moving parts in margin where we ended in...
Speaker 1: Q4 is about where we expected. We gave back some of the expansion you saw in Q2 and Q3 and we expect to be growing through the course of next year in the aggregate.
Speaker 5: got it and Brian congratulations on your retirement and good luck
Speaker 6: Thank you, Abraham.
Speaker 7: Thank you.
Speaker 4: Our following question is from Paul Olden from CIBC. Please go ahead.
Speaker 8: Thank you. Good morning. There's a lot of questions popping up around variable rate mortgages, and obviously Scotia is one of two banks that offer variable payment, variable rate mortgages. You adjusted a bit in your prepared remarks, but wondering if you can dive down a little bit deeper just in terms of how those higher interest payments are impacting youM
Speaker 8: consumer behavior, if at all, sort of give us a flavor maybe for what proportion of it converted to fixed payments or again any kind of pressure or payment behavior you're seeing.
Speaker 1: Sure Paul, I'll start and maybe Phil could add it if he would like. We really appreciate the question. We believe strongly that a variable rate mortgage should have a payment that varies.
Speaker 9: We are not seeing credit pressure in that category during Q4.
Speaker 9: full stop. We are certainly preparing for and are having lots of conversations about cash flow management at the customer level, but big picture the credit worthiness of the variable customer is higher than fixed and as Phil would have mentioned in his remarks, deposit balances are substantially higher and as we look at the liquidity position of checking and savings accounts.
Speaker 9: combined in the variable customer balances that are with us. We see well over a year worth of excess liquidity to absorb payment increases of $200, $300, $400 per month. So we're not concerned about the credit side of the mortgage position. And on the other end we're not seeing tremendous pressure on payment levels. In other words, credit card balances.
Speaker 9: expanded this quarter, as you will have seen, and our personal deposits are holding in on the non-maturity side. So from a consumer behavior standpoint, the variable customer is in good shape. I think our proportion of mix there is not showing up in the credit line and we're confident with the transparent structure and the conversations with
Speaker 9: that we're having with customers to date. The final thing I would say is on a big picture basis, strategically we've been focused in the mortgage business at cross-selling into the deposits. We've been doing that year on year now for the last three years. Fifty percent of our mortgage holders have a deposit account with us and within the first six months of opening variable rate mortgage customers.
Speaker 9: now have three or more products. So our visibility into their health and strength is good and we're comfortable with our position as we said last quarter.
Speaker 2: Just to add to that, and Dan had a lot of comments that would be consistent with mine as it relates to the credit performance, but you know, just to speaking in generally, we're not seeing any signs of stress across our portfolios, whether in retail or in our business banking segments right now. And we continue to monitor, as Dan mentioned, we've made significant investments in our ability to...
Speaker 2: look in and see how our consumers are behaving and the type of performance they have both in retail and in business banking. We're not seeing any signs of...
Speaker 2: Um, nope.
Speaker 2: liquidity pressures in our business banking book and certainly we're seeing the health of the Canadian consumer considerably stronger than they were pre-pandemic and holding. And so from a credit perspective we're quite comfortable with how these books are performing right now.
Speaker 2: And maybe just add to that I think it's also important as we as we look forward you know employment or rather unemployment continues to be you know strong in Canada and this is always a pre determinant of as we get sort of bumpier times but we're not seeing any any changes to that and certainly we're also seeing wage increases consistently.
Speaker 2: across our customer base as well, particularly for those customers that do participate in the variable mortgage program.
Speaker 8: That's helpful, thank you for your response.
Speaker 4: Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead..
Speaker 2: I just wanted to go back to the Canadian banking discussion and I'm not sure if this is for D.A. or Raj, but I think there's an interplay between corporate and treasury and Canadian banking. Maybe I can just ask it this way.
Speaker 2: You know, if if if the other or the Treasury costs in corporate were actually allocated, that the divisions are allocated back to the bank, would that decline this quarter have been worse, no different or better? And can you talk a bit about that?
Speaker 1: I'll start Doug and see if I can help you with that. On surprising as a factor, so what I want you to know is that doesn't apply only to the Canadian bank, whatever is in the other segment.
Speaker 1: Transfer pricing generally from an asset re-pricing perspective will track that.
Speaker 1: deposit transfer pricing happens quicker because very simply put the deposit rate tracks what would be the wholesale funding rate from a transfer pricing perspective.
Speaker 1: while the asset transfer pricing will happen as assets reprice in the business line. And that's to ensure that the business line name is consistent. This is not inconsistent with what other banks do. So I wouldn't attribute it only to the Canadian bank. This is the nuance when you have significant rate changes up or down, how it manifests itself in our bank and the other segment. That's the comment I'd make.
Speaker 1: But I would suggest that you take it up to the higher level, just look at it from an all-bank perspective, net interest margin. And if you understand the reasons why it moved up or down in any particular quarter, I think generally it will be in the right place.
Speaker 2: Okay, so the squeeze between the positive cost going up faster than the asset repricing is actually being captured within the other segments. I think we've talked about this before. And I guess the way they really kind of just high level is just think about to just attract the all bank. That's what you're suggesting.
Speaker 1: Yeah, that's what I'm saying Doug. I think it's easier than the all-bank name compression. The simple way to think about it is our funding costs have grown quicker. If you have a massive net rising catch yourself, you shouldn't see that problem.
Speaker 3: I'm going to follow up on what happened in IB this quarter. Yeah, yeah, okay. No, I make follow up. I'll leave it at that. Thank you very much.
Speaker 10: quarter. Yeah, yeah, okay. No, that may follow up. I'll leave it at that. Thank you very much. Thanks, Doug.
Speaker 4: Thank you. Our following question is from Gabriel Deschenes from National Bank Financial. Please go ahead.
Speaker 11: Good morning and Brian , best of luck in retirement, not that you need it, but pleasure engaging with you in the past nine years.
Speaker 11: My question is on Canadian banking margins, surprise, surprise, but you know, we talk about assets, the yields that are spreads that are tightening. I suspect that's mortgages. Can you talk about the spread dynamic in that business plus the impact of prepayment income, probably the client, and then just the left field question. It could be a quick yes or no answer. Is there any thought to, or current...
Speaker 11: to the AIRB model. Thanks.
Speaker 1: I'll take the second one first and then I'll start on the Canadian Bank. I'm sure Dan will have more to say. No, we're not looking to move any of those portfolios to ARB anytime soon Gabe. I think that was the short answer.
Speaker 1: on the Canadian banking them what
Speaker 1: There's a couple of nuances in this quarter, so we've called it out in the disclosure. On the moment one is the timing of prime CDOR, and that's always going to be a factor, not necessarily for the case.
Speaker 1: for Scotiabank but for other banks because we price off Prime and then the CEDAW moves in advance particularly in a rising rate environment. So that should normalize next quarter once Prime catches up which happened in the last week of October . Now which prepayment is? When rates go up you expect to see less prepayment happening and that's what we're seeing in the Canadian Bank's net interest margin.
Speaker 1: And like Tan talked a little bit earlier, that margin will continue to modestly expand in line with how the assets start to reprice and the pace at which, you know, various business exchanges will happen in the Canadian bank as the mortgage volume growth will slow down in 2023 compared to what we saw in 22.
Speaker 11: Right, no quantification of pre-dramatica.
Speaker 1: We haven't quantified it before. I don't think it's substantial, but if you back and through the NEM disclosure, you'll probably be within the ballpark.
Speaker 12: All right, thanks.
Speaker 12: Thanks, Gabe.
Speaker 7: Thank you.
Speaker 4: Following question is from Mario Mandonca from TD Securities. Please go ahead.
Speaker 8: Good morning everyone and Brian all the best to you in retirement. Thank you. So.
Speaker 3: Raj, let's get started first with.
Speaker 9: Going back to Abraham's opening question, he asks,
Speaker 3: for whether the all bank margin could only improve once rates.
Speaker 3: And the reason I want to go back to this is your disclosure indicates that the bank is positioned for falling rates. Higher rates lead to lower NII.
Speaker 3: lower rates lead to higher NII. So can we interpret from your disclosure
Speaker 9: that the all-bank margin can only improve once rates start to fall, or is that too simple an interpretation?
Speaker 1: I look at it two ways. Directionally you are right Mario. Yes, we will benefit from falling rates. The balance sheet is positioned that way.
Speaker 1: One of the key factors which applies now is the pace of asset repricing and depending on how fast that reprices, the benefit will be higher than what we show in that disclosure, but directionally or by based on disclosure.
Speaker 13: Okay.
Speaker 3: Different type of question then. This is probably the most frequently asked question throughout this last quarter.
Speaker 3: It relates to debt service costs. We can all appreciate that unemployment is an important aspect of the stage 1, stage 2 performing loan.
Speaker 3: provisions.
Speaker 3: But debt service costs and debt service ratios clearly are going materially higher.
Speaker 3: Could you talk about how that factors into your performing loan provisions and whether it's really just a matter of time before all the banks have to start building performing loan reserves for their mortgage book?
Speaker 2: Yeah I'll start. I'm happy to take that. It's still here. Thanks for the question. You know I go back to some of the comments I made in my prepared remarks.
Speaker 2: my comments from a few minutes ago. You know, while PDSRs have been increasing just because of the cost of the mortgage, we're not seeing any sort of reciprocal stress and as I said most of our customers still are maintaining high levels of liquidity in their portfolio, in their deposit accounts. So for example our average customer
Speaker 2: over the last quarter or so. And so you know as we as we're looking at performing loans and we look at our forward-looking indicators, I know there's some...
Speaker 2: built in pessimistic scenarios for macroeconomic, but what we're seeing more importantly is the credit change in quality is actually a tailwind for us from a performing loan perspective. And I think that's important to note as you're looking forward. So I would be less focused on TDSRs and I'd be more focused on health of the consumer, quality of the portfolio, sort of the shift in the dynamic within the industry.
Speaker 1: Sure Mario, as you know investment gains will be lumpy, right? In any quarter and in any year. The first three quarters of this year we...
Speaker 1: I think we had $1 million if I remember my numbers right. We didn't have any opportunities. But we continue to roll those because these are high quality liquid acids. We hold it for liquidity purposes.
Speaker 1: And depending on when we invest and when we think it has reached its economic value to the maximum and we don't think that it's going to raise in value so to speak because of interest rate changes, we monetize it. We just had the opportunity to do it when some of the securities, debt securities, this quote and that's what you're seeing. Like I said, it'll be lumpy. It all depends on the time at which we put on these securities and how much value does it gain based on rising rates, falling rates.
Speaker 3: driven by corporate loans, both on a quarter for quarter and year over year basis. So my question is like what?
Speaker 14: sliding that robust growth in this segment, if you can slide it, perhaps a little bit of an outlook, and if that did contribute to the higher personnel cost in the quarter.
Speaker 15: Great, thanks for the question Scott. So there's a few things in that question.
Speaker 15: First thing I'd say is we're very focused on our existing clients and adding in new clients. And that's been core to that loan growth that you're seeing in the business. A big part of that loan growth is happening in the US where we're focused on the America strategy. And I think that's important to note because we've talked about that several times.
Speaker 15: Q3 was a very quiet DCM quarter. Not a lot of activity happening. So we saw a lot of clients come into banks for facilities. We're going to see that monetized as we move into 2023. Excuse me, I've got a bit of a horse throat. So we're quite confident. We're being there for our clients. We're putting out balance sheets and we're doing it on both sides. The deposit line continues to grow.
Speaker 15: and we have an LDR in the business below one, which is positive I'd say. In terms of performance costs in the quarter, Q3 was an air pocket for the capital markets industry, and what we saw happen was a step back in the performance costs for the year. That stepped up ahead when we delivered what we thought was a pretty solid Q4.
Speaker 15: Does that help you answer your question, Scott? Yeah, that's very helpful. Thank you very much. Thank you. Thank you.
Speaker 4: Thank you. Thank you. Our following question is from Darko Milek from RBC Capital Markets. Please go ahead.
Speaker 14: Thank you. Good morning. And Brian also best of luck in retirement.
Speaker 3: I just wanted to dig, Dan, a little bit deeper into the mortgage question.
Speaker 3: You mentioned in your remarks that, or in response to one question, that there was a shift from variable to fixed, but when I look at slide
Speaker 3: What slide is it? 35. I don't see a change. Quarter over quarter. And there was a lot of rate increases that just recently happened. My question on the portfolio of mortgages is really to dig into a couple of different areas. First and foremost, if there is a shift happening from the existing variable rate...
Speaker 3: mortgage portfolio to fixed, could it be that originations are heavily variable rate?
Speaker 3: mortgage related and therefore you don't see an overall shift in the portfolio. Are you in fact...
Speaker 3: suggesting to customers
Speaker 3: to continue to go down the variable rate mortgage as a preferred vehicle, especially since you think rates are going down.
Speaker 3: And lastly, with respect to the average loan-to-value,
Speaker 3: For the whole portfolio, I see it rising a little bit. You have a very heavy concentration in Ontario.
Speaker 3: where house prices are falling. So maybe you can speak to what you're seeing there on loan to values of the portfolio and where you think that's headed over the next couple of quarters, please. Thank you.
Speaker 9: Sure, Darko, there's a lot there and I am sensitive to think RBC's calls at 9. So I'll make this brief and we can do a follow up in detail if you like. My comments around shift to fix was new business flows during the fourth quarter as opposed to I think the slide you're referencing is a photograph of the stock of the portfolio. We are not on the front foot with regards to advising customers strongly into or out of variable effects. We work with a customer based on...
Speaker 9: say we're over indexed in Ontario necessarily. I would say we're slightly under indexed in Quebec versus the rest of the marketplace. Clearly as house prices have deflated over the last number of months, you know, the emphasis on loan to value at origination will be maintained at, call it Phil Thomas's credit risk standard as the book comes in for renewal.
Speaker 9: Where we are concerned about any consumer situation, we will re-appraise the value of the home and decide whether we want to renew on that basis. We are not leaning into high LTV, high TVSR, long amortization.
Speaker 9: credit situations in the mortgage book, we believe very strongly that immigration, employment, wages, shortage of housing will be constructed for the housing market once we get through this price adjustment period and as margins return as the prime seed or compression dissipates.
Speaker 12: Thank you. You're welcome.
Speaker 4: Thank you.
Speaker 4: Our following question is from Sorab Movahedi from BMO Capital Markets. Please go ahead.
Speaker 15: Thank you and Brian , congratulations on a very illustrious career.
Speaker 16: Phil, I have just maybe a quick clarifying question. I think you've talked about normalization, I'll call it, on the PCL into the mid-30s.
Speaker 16: Can you just talk a little bit more detail on that? What should have been unemployment rate?
Speaker 16: Where is that?
Speaker 16: you know performing versus non-performing and how does it kind of which line items or business segments or geographies would you say you're kind of out I guess over earning and right now on that line so you know would just be adding to performance and mortgages in Canada or is it non-performers and business lending in latam or you know just
Speaker 2: if you could give me a little bit more color as to how we get to that in the 30s and what sort of assumptions are we on? Sure, that's not a quick question, but I'm happy to maybe answer it and you and I can maybe spend a little bit of time together offline. But I'd go back to, you know, we...
Speaker 2: If you look at where we were a year plus ago, this bank has done a tremendous amount of work to de-risk our portfolios. And so as we head into 23, a new normalized run rate is sort of in that mid 30s basis point range. I would say the mid 90s basis point range for international banking.
Speaker 2: And so we continue to grow our mortgage book in international, continue to put on more secured lending. Our focus has primarily been on affluence or the higher end segment. And as I mentioned in my remarks, about 96% of our originations in I.D. are sort of that higher credit quality segment now. And so we're really, as we normalize…
Speaker 2: It's sort of a new normal in the sense of the portfolios have really shifted. Again, higher focus, big focus on high investment grade, corporate and commercial lending. And so, as I look out into next year, I'm confident in the guidance and we'll continue to work very, very closely with Dan and Nacho and Jake and James Neat and others to make sure that we have that focus on higher quality credit moving into the year.
Speaker 2: I would also say that this bank has made a significant amount of investment in the collections. We have built collections hubs, we've invested in technology, we've invested in analytics, and so we're doing a lot of preemptive phone calls to customers who we may see have a bit of stress. And so both from a quality of the portfolio, the processes that we have in place to help our customers, and from a collections perspective, we're feeling pretty good as we go into next year.
Speaker 16: What's the unemployment rate in Canada behind the 30 basis point?
Speaker 2: It would be, obviously we stress test our portfolios on a regular basis every day and we have a number of stress scenarios for unemployment that we put into the stress scenarios and I'm happy to maybe spend a little bit of time with you offline and we can go into those.
Speaker 16: Okay, but the mid 30 basis point you don't, it's not based on an unemployment rate?
Speaker 2: It would be based on a whole bunch of different factors including unemployment, our outlook, how we're thinking about our portfolios, what is performing, what are we looking at for not performing, where are we focused on in terms of growth of assets.
Speaker 14: Okay, thank you.
Speaker 4: Thank you. That's all the time we have for questions. I would now like to turn the meeting back over to Mr. Port.
Speaker 15: Thank you very much. I wanted to extend my sincere thanks to the analyst community for your ongoing coverage of the bank and to our investors for your continued support of the bank. I'm extremely proud of our team of over 90,000 Scotiabankers for their tireless efforts to put our customers first. And I have every confidence that Scott Thompson and the entire leadership team will continue to build on the strong foundation we have established.
Speaker 15: and the many successes we have achieved over the past decade. Together we have built an enduring, resilient institution that continues to champion Canadian values around the world. It has been the privilege of my lifetime to serve as CEO of this storied institution.
Speaker 15: and I have every confidence that the bank's best days are yet to come and I wanted to wish you and yours all the very best for the upcoming holiday season and beyond. Thank you very much.
Speaker 15: are yet to come and I wanted to wish you and yours all the very best for the upcoming holiday season and beyond. Thank you very much.
Speaker 7: Thank you.
Speaker 4: The conference has now ended. Please disconnect your lines at this time and we thank you for your participation.
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